Slow Train Coming: Wintel Aims at Sun Microsystems Again

Nervous Sun Microsystems (SUNW) shareholders will be tuning in to the company's mid-quarter conference call Tuesday afternoon, anxious to hear whether Sun expects to meet its fiscal fourth-quarter estimates. But more broadminded observers might want to step back and contemplate the distant and uncertain future of the Unix systems giant.

After nearly seven years of development in partnership with Intel (INTC), Hewlett-Packard (HWP) has finally unveiled a line of servers powered by the new Intel Itanium processor. Few expect the new chips to have an immediate impact. But many are seeing this as the latest signpost of the inexorable incursion of commodity servers into the lucrative high-performance market dominated by Sun.

Now, people have been calling for the total commoditization of the server business for years. Servers running Microsoft's (MSFT) Windows operating system and Intel chips -- Wintel servers, if you will -- have made huge inroads in the low- to mid-range markets. But so far the trend hasn't extended into the high end, due to the inescapable fact that Wintel servers can't perform heavy-duty computing tasks as well as machines using more expensive 64-bit RISC processors, including Sun's family of UltraSparc chips, which the company develops itself at no small cost. (RISC stands for reduced instruction set computing.)

Intel's new Itanium chips close the performance gap some. They process data in 64-bit packs, enabling them to handle about twice the workload of Intel's 32-bit Pentium processors. But even so, don't hold your breath waiting for customers who demand 64-bit processing power to become Itanium converts anytime soon. The first-generation chip mainly will be used in pilot and development programs, and most observers hold greater hopes for McKinley, the second-generation Itanium chip, scheduled to be released early next year.

Ready for the Mainstream?

"Over time, it will have an impact," says Stephen Dube, an analyst at Dresdner Kleinwort Wasserstein. "The first version certainly won't do it. McKinley will have features more attuned to the server market, but Itanium alone won't do it. It's more important that Microsoft upgrade the operating system. Right now, Windows 2000 is just not a high-level operating system relative to [Sun's operating system] Solaris. I'm not aware of anything that's truly a next generation of Windows 2000. I know I'm not alone in saying that it's not an operating system ready for the mainstream." (Dube's firm hasn't done underwriting for Intel, Sun or Microsoft.)

Wintel's ascension 'will just happen,' says Davey. 'I don't see an end to it. It's like the stock market -- it goes up and it goes down, but it always goes up in the end.'

Last Wednesday Microsoft said it will release a 64-bit version of its Windows server operating system on Oct. 25, the same day it starts selling its 32-bit system for PCs. The 64-bit Windows system won't work with systems using more than 16 processors. Of course, such systems don't exist yet anyway. H-P's biggest such box uses 16 Itanium processors, while Dell's (DELL) recently announced Itanium-based PowerEdge servers use four. Sun's Solaris operating system, by contrast, already supports 64 processors.

If Sun's nervous, it's not showing it, preferring to play up Itanium's practical and performance limitations. "It's going to cause a lot of pain in terms of migration in Intel's installed base going from 32 bit to 64 bit," says David Yen, vice president and general manager for Sun's processor product group. "And even if people are willing to put up with all that, we're highly skeptical that customers will attain good performance for their real-life applications. Even Intel is saying that this is mainly a development chip. They're hoping its successor will be better."

H-P, which started developing Itanium in concert with Intel way back in June 1994, agrees that the new processor family won't change much immediately. The company prefers to take the long view, seeing the rollout process taking two to four years before Sun starts to see real competition from Intel-powered servers. H-P and others hope that when that happens, Sun will start feeling the weight of its proprietary business -- namely, the cost of developing its own processors and operating systems.

Basic Math

"As Sun continues with its current stance, the business model doesn't add up," said Mark Hudson, worldwide marketing manager for H-P's business systems and technology group. "They'll be a sole force out there with a proprietary architecture, trying to compete against companies that have moved to a standard base architecture. For vendors it will help improve cost and supply-chain efficiencies. For customers, it gives greater flexibility, more applications choices, and reduces their cost of ownership. It's really the long-term implications of this that matter."

Sun got lucky when giant competitors like IBM (IBM) and H-P decided to neglect the Unix market in the mid-1990s, focusing on producing Wintel machines instead. When the Internet and demand for Unix servers took off, Sun managed to make huge gains in market share despite enduring its own difficulties in updating its UltraSparc chips.

It's unlikely that things will be that easy ever again for Sun. The dot-com spending frenzy has abated, H-P and IBM have become competitive in Unix and Sun now sits 68% off its 52-week high. Meanwhile, in the background, the Wintel story keeps improving bit by bit.

"It's a long, slow process that I thought a couple of years ago was going to be a lot quicker," says Mike Davey, an analyst at Investec Ernst who has no position in Sun or Microsoft. "It's inevitable but the timing is unpredictable. What's happening with Microsoft is the same thing. You get W2K, and 18 months later, you get XP. It's not going to be great, but it's incrementally better than 2000. Eventually, Sun is going to be seeing very high-end stuff that's basically going to be made for commodity markets."

"It'll just happen," Davey continues. "I don't see an end to it. It's like the stock market: It goes up and it goes down, but it always goes up in the end."

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